Crowding-Aware Volatility Timing for Factor Portfolios
Year: 2026
Type: article
Abstract: This paper examines whether factor crowding explains when volatility management improves factor investing. Using six U.S. equity factors—MKT, HML, MOM, RMW, CMA, and BAB—and VIX from 1990 to 2026, I construct a return-implied factor crowding index based on factor run-ups, return persistence, and VIX-related fragility. Standard volatility management improves average portfolio performance, but its gains are not concentrated uniformly in high-crowding states. Instead, crowding is most informative when combined with volatility and market stress. A crowding-conditioned volatility-management strategy improves the trade-off between return, volatility, skewness, and drawdown. In recursive out-of-sample tests, the strategy outperforms both unmanaged factors and standard volatility-managed factors, suggesting that volatility timing is most effective when it distinguishes ordinary volatility from crowded-position fragility.
DOI: 10.3905/jpm.2026.085
Author: Xuan Feng
Institution: Ecole des Hautes Etudes Commerciales du Nord
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7223350647